Liquidnet sets out Asian growth strategy

Having been one of Asia’s key success stories in 2011, block trading venue Liquidnet will now focus on sustaining the momentum achieved this year with the introduction of new products that may include a version of the firm’s H2O service.

Having been one of Asia’s key success stories in 2011, block trading venue Liquidnet will now focus on sustaining the momentum achieved this year with the introduction of new products that may include a version of the firm’s H2O service.

Liquidnet’s H2O crossing pool is currently available in the US and Europe and incorporates flow from non-buy-side sources, compared to its core crossing network, which is restricted to institutional investors.

“H2O is a very specific model and we’ll be looking at the opportunities for that as well. Whether or not we’ll see the full H2O model come to Asia next year remains to be seen, but it might a bit too early. It depends largely on the level of sophistication of the counterparts we would look to deal with,” said Lee Porter, head of Liquidnet Asia Pacific.

Porter emphasised that efforts to grow market share will rest on a multi-prong strategy of expanding the client base in existing markets, potentially bringing Liquidnet’s products that have proven successful in the US and Europe to Asia, and hopefully breaking into new markets.

“We’ve now got a sufficiently large amount of liquidity in the system across the various markets, and we’ll look at our products that have proven successful in the US and Europe and the opportunity of bringing these to Asia and bring additional liquidity into the system that we can’t do through traditional means. We have things like the trading desks in Europe and US which means if people can’t integrate with us through their OMS or EMS, we can receive the order for them and work them in the Liquidnet pool or work it externally,” Lee added.

Liquidnet’s average execution size year-to-date up to November 2011 was US$1.22 million, up approximately 12% from 2010 and over 116 times the average execution size on the Hong Kong Stock Exchange over the same period. Year-to-date principle traded in South-East Asia, including Indonesia, Malaysia, and Singapore, was US$1.52 billion, up 141% from the same period in 2010. Year-to-date average daily liquidity increased by over 21% year-over-year to more than US$8.6 billion.

Over to the west

In Europe, Liquidnet has a partnership with SIX Swiss Exchange that enables trading members to place blocks in the firm’s institutional crossing network, and it is also in discussions with other exchanges to promote the concept. “We have had a number of discussions with numerous exchanges globally. The SIX Swiss deal was groundbreaking for us, and we have had discussions with a number of exchanges in the region and we will be looking potentially to pursue that opportunity. That said, these things take a long time,” Porter noted.

Liquidnet launched in Asia in November 2007, offering block trading in Hong Kong, Singapore, Korea and Japan. It has since expanded to Australia (February 2008), New Zealand (June 2010), and more recently Malaysia (November 2010) and Indonesia (January 2011).

When seeking to launch its platform in new markets, Liquidnet is inevitably confronted with local market regulations – such as Indonesia, which only allows locally incorporated brokers to trade with domestic buy-side firms – that can be prohibitive. In India, crossing is only permitted during a small window before the starts of the continuous trading session and stocks can only be crossed at +/- 1% of the previous day’s close, which would place heavy restrictions on Liquidnet’s model. In China, buy-side firms are only able to access the domestic markets via a broker’s Qualified Foreign Institutional Investor quota.

Nonetheless, the pace of change in the structure of Asia’s equities markets will continue to present opportunities for Liquidnet’s business. “There are a number of markets in Asia that we’ll continue to look at to try to figure out how best it could work. We would certainly look at new markets on their merits but as in which markets and what order, there’s still a bit of work to be done. But entering new Asian markets is certainly a part of our longer term strategy for sure,” Porter noted.

The rise of high-frequency trading (HFT) in Asia has made trading in size a more challenging task, and exchanges need to give due attention to the requirements of institutional investors while trying to capture more high-frequency flows, Porter said.

“HFT is only going to increase in Asia. The exchanges’ dynamics have changed. Traditionally, their revenues streams had come from trading fees, clearing, listing fees and market data, but now the exchanges make a larger portion of their revenue from market data and co-location, which is there for sophisticated investors and high-frequency traders.

The region’s exchanges have done relatively little to cater to institutional investors. They’ve done a lot for retail investors over time and more recently catered for sophisticated investors in terms of improving infrastructure and reducing latency, which typically supports the HFT community. That said, we are seeing the exchanges looking at what else they can do and they are certainly aware that while their revenue models have changed over time, they haven’t really paid sufficient attention to the institutional investor needs which form a big part of their overall market volume,” he added.